By Michael Greenstone
We are on course to set another record for the hottest year, the third year in a row, and 2016 may well have the most billion dollar weather disasters. Adaptation to a changing climate looks both necessary and inevitable.
Adaptation is most successful when we let markets identify the best opportunities to protect us. Markets have helped society conquer countless challenges, including the discovery of drugs to protect against new diseases, innovations to solve communications problems, and more. But we’re probably forestalling adaptation if we don’t allow markets to accurately and freely price the risks caused by climate change.
Climate change is projected to bring more frequent damaging storms, with high winds and flooding. Successful adaptation probably requires the construction of sea walls and the building of sturdier homes — perhaps even less coastal development. But these changes are unlikely to occur without clear incentives.
Insurance markets provide such incentives by communicating where adaptation is needed. But in too many states, well-intentioned regulations aren’t letting the market properly price climate risk. There’s less motive to act, leaving households and society exposed to unnecessary risk. A good example is Florida’s insurance market, where regulations cap premiums — forcing inland areas to pay more for wind insurance, while the coastal residents don’t pay premiums reflecting their higher risks…